ACCOUNTING FOR

CORPORATION
 Introduction
• The Philippine Corporation Code defines a corporation
as “an artificial being created by operation of law,
having the right of succession and the powers,
attributes and properties expressly authorized by law or
incident to its existence.”
• A corporation is formed by at least 5 but not exceeding
15 natural persons, all of legal age and a majority of
whom are residents of the Philippines.
• The entity’s articles of incorporation must be
authorized by the Securities and Exchange Commission
(SEC).
 Introduction (Continuation)
• The articles of incorporation states, among other things,
the entity’s authorized capital stock, which is the
maximum number of shares that the entity can issue. Any
excess share issued is deemed illegal. In order to issue
shares in excess of the authorized capital stock, the entity
must amend its articles of incorporation.
• To amend the articles of incorporation, a majority vote of
the board plus a vote by shareholders representing at
least two-thirds (2/3) of the outstanding share capital is
needed. After ratification, the amended articles of
incorporation are filed with the SEC and shall become
effective only upon approval by the SEC.
• At least 25% of the entity’s authorized capitalization should
be subscribed and at least 25% of the total subscription
must be paid upon subscription. In no case shall the paid-
up capital be less than five thousand pesos (₱5,000).
Components of Stockholders’ Equity
• The following transactions affect the accounting for a
corporation’s equity:
1. Authorization, subscription, and issuance of shares
2. Acquisition and reissuance of treasury shares
3. Retirement of shares
4. Donated capital
5. Distributions to owners (Dividends)
 Accounting for share capital


1. Memorandum method - Only a memorandum

is made for the authorized capitalization.
Subsequent issuances of shares are credited
to the share capital account.

2. Journal entry method - The authorized

capitalization is recorded by crediting
“authorized share capital” and debiting
“unissued share capital.” Subsequent
issuances of shares are credited to “unissued
share capital.”
 Example:
• On January 1, 20x1, ABC Co. received
authorization from the SEC to issue share
capital of P1,000,00 divided into 10,000 shares
part value per share of P100.
• Of the total authorized share capital, 25% was
subscribed at par value and 25% of the total
subscription was paid at subscription date.
• On February 1, 20x1, ABC Co. received full
payment for P2,000 subscribed shares and
issued the related share certificates.
• On February 28, 20x1, ABC received cash
subscription for 1,000 shares at par value.
 Classes of share capital


• Share capital is basically classified into two, namely:

1. Ordinary share capital (common stock); and
2. Preference share capital (preferred stock).
Four basic rights of ordinary shareholders


1. Right to attend and vote in shareholders’ meetings

2. Right to purchase additional shares (also known as
preemptive right or stock right)
3. Right to share in the corporate profits (also known as right
to dividends)
4. Right to share in the net assets of the corporation upon
liquidation
 Share premium


• Share premium (additional paid-in capital) arises

from various sources which include the following:
1. Excess of subscription price over par value or
stated value.
2. Excess of reissuance price over cost of treasury
shares issued.
3. Issuance or origination of other equity
instruments, such as share options, detachable
share warrants, and equity components of
compound financial instruments.
4. Distribution of “small” stock dividends.
5. Quasi-reorganization and recapitalization.
 Example:
• ABC Co. started operations on January 1,
20x1. Its authorized capitalization is
P1,000,000 divided into 10,000 shares
with par value per share of P100. ABC Co.
receives cash subscriptions for 5,000
shares at P120 per share.
• On January 20x1, ABC receives
subscription for 2,000 shares at 160 per
share.
 Legal capital

• Legal capital is the portion of contributed capital that cannot
be distributed to the owners during the lifetime of the
corporation unless the corporation is dissolved and all of its
liabilities are settled first. Legal capital is computed as
follows:
1. For par value shares, legal capital is the aggregate par
value of shares issued and subscribed.
2. For no-par value shares, legal capital is the total
consideration received or receivable from shares issued or
subscribed. Total consideration refers to the subscription price
inclusive of any amount in excess of stated value.
 Share issuance costs


• “The transaction costs of an equity transaction are

accounted for as a deduction from equity to the extent
they are incremental costs directly attributable to the
equity transaction that otherwise would have been
avoided.” (PAS 32.7)
 Example:
On January 1, 20x1, ABC Co. issued 1,000
shares with par value of P100 for P120 per
share. Share issuance costs amounted to
P5,000.
 Treasury shares


• Treasury shares (treasury stocks) are an

entity’s own shares that were previously
issued but are subsequently reacquired
but not retired. Under the Corporation
Code, an entity may reacquire its
previously issued shares only if it has
sufficient unrestricted retained earnings.
 Accounting for treasury shares


• The cost method is used in accounting for treasury

share transactions. Under this method, the reacquisition
and subsequent reissuance of treasury shares are
recognized and derecognized, respectively, at cost.
Retirement of shares

 Donated capital


1. Donation from shareholders – recognized

directly in equity (i.e., credited to share
premium).
2. Donation from the government – recognized
as government grant.
3. Donation from other sources – recognized in
profit or loss (i.e., income) when (a) the
conditions attached to the donation are
fulfilled or reasonably expected to be
fulfilled, (b) the donation becomes
receivable, and (c) the criteria for asset
recognition is met.
 Donated capital (Continuation)

• Cash – recognized at the amount of cash received or
receivable.
• Noncash assets – recognized at the fair value of the
noncash assets
• Entity’s own shares – initially recorded through memo
entry. Donated capital is recognized only when the
donated shares are subsequently reissued. This is because
no asset is generated from the donated shares until they
are subsequently reissued. If the donated shares are not
to be resold, the entity should effect a formal reduction
of its authorized capital by retiring the shares received.
 Example
• ABC Co. received cash of P100,000 and
land with fair value of P500,000 and
historical cost of P300,000 from a
shareholder. No conditions are attached to
the donation.
• ABC Co. received 1,000 shares with par
value of P100 and fair value of P120 per
share from a shareholder as donation.